Do I have to form a partnership, LLC or corp to bring onboard a technical partner?

QUESTION:

My background is in small business management, as well as sales and marketing. However, I have a few business models I’d like to pursue taking advantage of. My challenge is that they each require the skills of a programmer (which I don’t have) to build either a very detailed website or an iPhone app, both of which would also require someone to update and maintain them. My question is can I form working relationships with individuals with these skills in order to start my business, perhaps with a working contract and not by forming a partnership, LLC or a Sub S Corp?

You can enter into contracts as an individual, or as a sole proprietorship (often referred to as a “DBA” — a person “doing business as” a brand name), rather than forming a discrete business entity. Whether it’s worth doing so depends on your plans for the business and expectations regarding the relationship.

There are three main arguments in favor of forming a business entity such as an LLC or corporation: co-founders, employee equity, and protection from liabilities. If you have any co-founders, as a practical matter, a legal entity is essential. (Partnerships are the simplest but I prefer LLCs for small businesses that aren’t planning to raise investment capital.) It enables the business to hold assets, enter into contracts, and allocate profits and losses to the co-founders. Similarly, if you expect to have employees and want to give them some ownership stake in the business, you’ll need a legal entity. An LLC can issue profit interests, but if you’re planning to issue equity to more than a handful of employees/advisors/consultants, the simplest structure is to form a corporation and adopt a stock option plan.

Assuming neither of the above applies, you could go ahead and enter into a service provider relationship with the developer to produce work for you as an individual or sole proprietor. It’s important to have a good contract that assigns to you all of the intellectual property rights (often referred to as “work for hire”) in the works of authorship created by the developer on your dime. However, I wouldn’t recommend it because as owner and operator of the business, you’d face potential unlimited personal liability for debts, losses and claims against the business. An LLC or corporation would give you a layer of protection such that, provided everything is properly documented, if the business encountered a catastrophic liability of one kind or another, you could bankrupt the business entity without losing your own personal assets. Of course, that is a last resort, and it’s advisable to protect the business through good business practices, well-drafted terms of service and comprehensive insurance coverage.

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Comments & Advice:

You can enter into contracts as an individual, or as a sole proprietorship (often referred to as a “DBA” — a person “doing business as” a brand name), rather than forming a discrete business entity. Whether it's worth doing so depends on your plans for the business and expectations regarding the relationship.

There are three main arguments in favor of forming a business entity such as an LLC or corporation: Co-founders, employee equity, and protection from liabilities. If you have any co-founders, as a practical matter, a legal entity is essential. (Partnerships are the simplest but I prefer LLCs for many reasons.) It enables the business to hold assets, enter into contracts, and allocate profits and losses to the co-founders. Similarly, if you expect to have employees, and want to give them some ownership stake in the business, you'll need a legal entity. An LLC can issue profit interests, but if you're planning to issue equity to more than a handful of employees/directors/consultants, the simplest structure is to form a corporation and adopt a stock option plan.

Assuming neither of the above applies, you could go ahead and enter into a service provider relationship with the developer to produce work for you as an individual or sole proprietor. It's important to have a good contract that assigns to you all of the intellectual property rights (often referred to as “work for hire”) in the works of authorship created by the developer on your dime. However, I wouldn't recommend it because as owner and operator of the business, you'd face potential unlimited personal liability for debts, losses and claims against the business. An LLC or corporation would give you a layer of protection such that, provided everything is properly documented, if the business encounters a catastrophic liability of one kind or another, you could bankrupt the business entity without losing your own personal assets.